Performance review

Results in the first half of 2018 are in line with expectations

In the first half of 2018, the revenue of railway construction equipment was 1.218 billion yuan, an increase of 30.8 percent over the same period last year. The net profit belonging to the parent company was 82.3 million yuan, an increase of 206.1 percent over the same period last year, corresponding to a profit of 0.05 yuan per share. The performance is in line with expectations.

Expenses fell and net profit bottomed out. In the first half of 2018, machinery sales increased by 130.0% compared with the same period last year, mainly due to the recovery of the industry. Revenue from spare parts sales and railway line maintenance services decreased by 59.5% and 50.6% respectively compared with the same period last year. Gross margin fell 2.9 percentage points. The rates of sales, management and financial expenses decreased by 0.9%, 2.4% and 3.8% respectively. Net profit margin improved by 3.9 percentage points to 6.8%. The operating cash flow is 134 million yuan.

Trend of development

Results are expected to continue to improve in the second half of the year. In the second half of 2017, the company's revenue was only 887 million yuan, far below the historical average. Considering the low base and the recovery of the railway industry, revenue is expected to bottom out in the second half of the year.

The amount of railway equipment purchased in 2018 is lower than previously expected. The Railway General Administration plans to invest 732 billion yuan in fixed assets in 2018, of which 80 billion yuan is invested in locomotive and rolling stock procurement, which is lower than the previous forecast of 100 billion yuan.

The railway industry is expected to recover in a trend. Railway equipment enterprises will benefit from policy support. The government has announced measures to encourage rail freight transport. In addition, Premier Li Keqiang said that China will strengthen infrastructure in the central and western regions. At the same time, the central government is expected to provide more financial support for railway construction.

Profit forecast

We lowered our earnings per share forecasts for 2018-19 by 68% and 69% to 0.09 yuan and 0.10 yuan, mainly due to deleveraging by government departments, and the amount of investment in railway construction and the purchase of railway equipment were lower than previously expected.

Valuation and suggestion

At present, Railway Construction equipment trades at 16.2 times and 15.3 times 2018-19 P / E ratios. In view of the recent marginal relaxation at the policy level, fine-tuning of monetary policy and more aggressive fiscal policy, the recommended rating was maintained, and the valuation center of the rail sector moved down, lowering the target price by 30% to HK $2.17 (20 times and 19 times 2018-19 price-to-earnings ratio). There is room for a 17% rise compared with the current share price.

Risk

The tender has been postponed.